October 2011 Dividend Income Update

The simple fact is: success breeds success.

This is why I firmly believe owning a basket of dividend-paying stocks as part of my overall investment plan is important.   Month after month and quarter after quarter, success is bred by reinvesting most of my dividends paid from our stock holdings to buy more whole shares in the same established Canadian companies that have a long history of paying dividends.  Rinse and repeat.

Lowell Miller expressed it nicely in his classic The Single Best Investment:

“Dividends and dividend growth are the real-life signal that a company has the wherewithal to pay you…it is the logical and inevitable result of investing in a company that is actually doing well enough, in the real world, to pay both dividends and to increase them on a regular basis. Dividends are paid from earnings. When a company has reached a certain level of maturity and stability, it begins paying dividends. What you see is what you get. Through the dividend, a company can show you how well it’s doing.”

Sure, not all dividend-paying companies are created equal.  Sun Life Financial and other lifecos are struggling with this low interest rate environment.  Canadian banks on the other hand are still making money, loads of it, off mortgages and car loans to name a few things and probably always will.  These are leveraged businesses after all and leverage is risky.  This is why it makes sense to be diversified across many different companies and sectors.

I’m slowly building a portfolio of 30+ Canadian dividend-paying stocks to compliment my predominantly indexed RRSP, and this two-pronged, a bunch of indexing here and dividend investing there, seems to be working.  As of this month, I’m on pace to earn about $5,100 in dividend income this calendar year but almost all of that income is reinvested for more shares.  That’s almost $700 more than this time last year.

Earlier this month, when the equity market skies were supposedly going to crash again amidst Greek banruptcy and the ongoing Eurozone crisis, I bought a new dividend-payer:  First Capital Realty (FCR).  Was I worried about the markets?  A bit, but can I control the markets?  No.  What I can control is what I buy and when I buy it. What I can control is my emotional reactions to what markets are or are not really doing.  I’m doing my best not to succumb to Mr. Market’s gyrations.  Crises come and go and life goes on for so many of these established companies.  FCR is an established company.  FCR has decent and sustainable yield.  FCR has good cash flow and strong earnings.  Check, check and check some more.

In terms of achieving my goal of a stable, diversified basket of dividend-payers, I’m about halfway there.  I’ve got a ways to go to diversify and many years of dividend investing ahead to get there.  I’m confident in my strategy, buying established companies.  I’m confident in my holdings and I’m confident, long-term, dividends will provide some secure passive income for us.   Dividends aren’t everything but they are very nice indeed.

Hopefully next month I’ll have more good news to report.

Your turn readers…

Indexers and dividend investors, what do you think of my strategy?

Are you more of an indexer that shugs at dividend investing?  If so, I want to hear from you!

Dividend investors, are you out there?  If so, I want to hear from you too!

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

19 Responses to "October 2011 Dividend Income Update"

  1. Since insurance companies are so beat up right now, isn’t now the perfect time to buy? I mean, their business is model has proven to be extremely profitable over time, we have just come through pretty much the worst environment for them in a long time right (with a LONG period of extremely low interest rates, and terrible market returns). I just can’t see some of these companies failing, and their price-to-earnings ratios still seem attractive to me for a long-term investment. Do you see Sun Financial having any real long-term problems for example?

    Reply
    1. Yeah, lifecos have been beat up, which makes reinvesting dividends in these stocks are the more worthwhile. I’m getting more SLF very cheaply every quarter. SLF, GWO, they both have great upsides I think. Their prices are quite low now.

      Like you, I can’t see these companies failing. I don’t foresee SLF or GWO having any long-term problems, they have good cash flow. If rates stay this low for another couple of years, a dividend cut may occur but that’s about it.

      Reply
  2. Keep it up man! $5,100 in additional income this year is really big! That’s a part-time job.

    I hope to be there in a few years. Congrats on your continued success. Success definitely breeds more success and that’s never more apparent than in the power of money making money (i.e. compounding growth).

    Best wishes!

    Reply
  3. I love your simple statement that success breeds success. Simple and yet profound. That is exactly what compounding does. I am working on moving more of my retirement portfolio into dividend paying stocks. Right now I have 4 which do that and will be adding more over the next year.

    Reply
  4. Mark,

    Just to take a different point of view, the RRSPs are you not deferring the taxes into the future? My concern with RRSPS in general is we are paying ever higher taxes. Plus the government forces you in retirement to take out more and more money out…which means more taxes to be paid.

    As an example, the claw back of OAS and the age amount (line 301 schedule 1) changed in about 2005. The age amount I believe starts as low as about $32-$33K!

    The other example schedule 1 line 305 on your tax return, if look at inflation last year this number was $10,320 and for 2010 it increased to $10,382! This has been a trend for years so in many ways poorer people are been pushed after inflation, into higher tax brackets.

    My thoughts (like the annuities) is try to pay as little tax in the future as possible. Saving taxes is like having a guaranteed rate of return.

    The other thing I think has a bigger bang for people (at retirement/where you have some control) is the TFSA.

    Insurance also (when set-up correctly grows tax free) can be similar to the TFSA without any limits. However, the rate or return would be lower than many dividend stocks…but if you don’t have to pay income taxes and need/want insurance this may make sense.

    Cheers,

    Brian

    Reply
    1. Hey Brian,

      Thanks for this perspective. Yes, use of the RRSP, is not tax-free but tax-deferred, as you well know.

      My concern is also the same as yours, who know what the government might or might not do with tax laws, RRSPs in question. So, while I enjoy using RRSPs to offset taxes owning for income now, I am only optimizing my RRSP, not maximizing it. This way, I’m only using this account defer minimal taxes as possible.

      You’re right that that OAS claw back starts relatively low.

      Annuities can be a good vehicle to pay as lilttle tax as possible, but in my 30s now, nearing my peak working years, I don’t think it’s a wise choice.

      Contrary to the RRSP, I am trying to maximize my TFSA (and my wife’s) because the TFSA is not income-tested. No claw backs to worry about. Unless of course, the government changes its laws. That can happen 🙁

      Reply
  5. Hi Mark,

    In my post regarding annuities here is the part I needed to get across.

    In order to really get a high rate of return (even in this low interest rate environment) one needs to get the permanent insurance early. You need to match it with the annuity to protect against an early death (say after 65).

    If you wait say until 65 your health maybe poor and you just closed the door. Remember, with the right type of insurance you can get all your premiums back plus interest!

    Even if rates stink, (you don’t like, or don’t want to purchase an annuity) in the future and you don’t want to lose control (of your money) the insurance route still gives 20% more money in retirement, less tax, less risk and more protection even using your dividends or EFTs etc.

    I don’t know if that makes sense..let me know!

    Cheers,

    Brian

    Reply
    1. @Brian,

      Good point, permanent insurance early can help. Waiting until 65 might be too late for an annuity, however, starting in my 30s seems too young. Unfortunately, personally speaking, I’ve already got competing retirement planning priorities (RRSP, TFSA to name a few).

      Your comment makes total sense, but what do you say to folks in their 30s (or 40s for that matter) about annuities? Potentially another post in the future, could address that 😉

      Reply
  6. Mark,

    If I told you when is the best time to buy a home for your family to live in for the next 20 plus years and you could afford it, would you wait for the market to bottom out for a few years from now or buy now? When you buy a house how much equity do you have at the beginning…not much right, over the years (like a mortgage) you own more of your house and owe less on your mortgage. This is the same for permanent life insurance. At the start the payments seem big but over time (say 20 years) you own your insurance policy and if it is set up correctly will double almost every 20 years.

    Example:
    So a 35 year old male gets a policy he pays for twenty years starts at (cost is $3585 per year) $150,000 (death benefit), by age 55 this grows to $255,000 (he stops paying) at age 65 this grows to $375,000 at age 85 this is now $739,000 (DB) (cash value is over $567,000 …which can never go down). The insurance allows one to spend other assets like stocks, real estate and when one dies…the bucket is filled up (the insurance policy) to the next generation.
    Look at insurance not as some sort of investment but the ability to unlock/spend other assets.

    I know it sounds crazy but how I was trained (back in 1994! with Investors Group) was buy term and invest the difference. Back then we suggested 12% was reasonable! Later it was 10%…8% and now maybe 6%!! I also see some fee only advisors talk about 5%…this means after inflation and taxes you are breaking even!!

    I left IG after four years, but I can tell you between that and the Wealthy Barber (yes he talked about 15% ROI…see page 34 of his book) rates of returns have been a big disappointment an anger with my industry and rightly so!

    People need to save at least 10% thats great advice and the most important. Problem is everyone likes to talk about rates of return (which is important) which why they look at ETF’s, index funds, real estate etc. Nobody talks about what if the returns are poor when one retires?

    How can one lower their risk and protect their family and have the ability to enjoy and spend their money in retirement no matter what economic/tax situation we may have? (see above example)

    cheers,

    Brian

    Reply
    1. @Brian,

      To answer your question, if I had the money now, I would probably buy it (the home) because who knows what the future may hold.

      I guess I do, given that scenario you provided of a 35-year-old, look at insurance as a long-term investment. I also look at it as an expense now, just like investments into stocks and bonds and RRSPs and TFSAs and the like, which should be significant assets in decades.

      I have never looked for my investments to yield 10%, let alone 15% (like The Wealthy Barber mentioned). I know it happened, but I never see that happening again given a variety of factors. I’ve always been happy with about 4-5% after inflationary costs are considered. I always will be.

      People need to save at least 10% – I totally agree. Rates of return are always important but you can’t invest what you don’t save. So, I always start with saving. I invest in modest products and I let the power of compounding and time do its work. Rates of return, for bonds at least, can’t be much lower in retirement for me than they are right now for others.

      That’s why it makes sense (to me) to dump as much as I can into equities now, then, when/if equities take more dives in the future (as I retire), I should have plenty of equities churning out dividends to live from. My goal is to have $30,000 in dividend-income goal at time of retirement, and I’m almost 20% of the way there in my 30s.

      Annuities may or may not fit into my picture. Time will time if I need this guaranteed product and who I’m trying to guarantee this income for.

      You have definitely though, given me some more information to think about….which is always good Brian!

      Reply
  7. Brian,

    Sounds like you are talking about a participating policy. Is that correct? How many companies out there are still offering this type of product? I seem to recall Sun Life getting back into that market after years of absence.

    Reply
  8. Steve,

    You are correct. The whole plans (par products) are less expensive than minimum funded Universal Life plans right now with more cash value.

    The companies I like are where you are an owner. I can’t say I have sold Sun Life or looked at their line up at all.

    Cheers,

    Brian

    Reply

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